Chapter 4: Ricardo does services: Service sector regulation and comparative advantage in goods
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Some countries export services more successfully than others. One important reason for this outcome is that certain countries have developed various underlying economic factors that enable them to become more productive in exporting certain goods (or services) more than others. Over the years, the empirical trade literature has uncovered several of these country-wide economic factors that explain why countries specialize, for example relatively good human capital, a larger pool of ICT capital or strong domestic institutions. This chapter assesses whether factors related to services have any bearing on specialization patterns of countries with respect to trade in goods. In particular, it investigates the relationship between the quality of the regulatory institutions in an economy and liberalization of services markets, which in turn should have an effect on the export of goods that use services as inputs. Indeed, this chapter shows that if the liberalization of services takes place under qualitatively good regulatory institutions, countries in which goods industries source relatively more services from these sectors will see a specialization in these services-dependent goods industries. This amounts to a regulatory comparative advantage.

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